Credit Crisis Made Easy

The New York Times has just run a lengthy article explaining how the whole mortgage-backed bond mess came to be. It is readable and easy to understand. It is called Triple-A Failure.

This article isn’t perfect. It doesn’t mention the substantial number of home owners who were defrauded by mortgage brokers. You see, many mortgage brokers were getting paid substantially more to originate high-interest rate sub-prime loans than they were good, solid, reliable prime loans. There is nothing like the smell of an extra large commission check to make a salesman behave like, well, a salesman.

It also barely mentions that virtually all forms of consumer debt have been securitized following the same models. There isn’t a guess as to the consequences of default rates edging up in those areas.

After you read this, ask yourself the following questions:

1. Why did the Federal Reserve give a massive loss guaranty to JP Morgan Chase in the takeover of Bear Sterns?

2. What can be done to hold the people who made huge profits off this stuff accountable for the fallout?

3. What is the total risk to Fannie and Freddie and what is that going to cost?

4. What exactly did we learn from the S & L crisis of the ’80’s?

5. Why are we letting banks post this stuff as collateral at the Federal Reserve window?